CSR under the Companies Act 2013 for the ICAI webcast on 11 june 2014

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Corporate Social Responsibility:

Corporate Social Responsibility Is it new to India? Legal requirements & its implications 11 June 14 CA S Rajeshwari 1

What is CSR?:

What is CSR? “ Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.” 2 Source : http://www.wbcsd.org/DocRoot/RGk80O49q8ErwmWXIwtF/CSRmeeting.pdf

Early definitions of CSR…..:

Early definitions of CSR….. 3

CSR defined by EU:

CSR defined by EU 4

What CSR means today:

What CSR means today CSR goes beyond philanthropy Holistic and integrated approach for sustainable development to all stakeholders CSR is a process that creates self-reliant communities It is a process of taking everybody together to have a sustainable society 5

CSR In India:

CSR In India How CSR has grown in India over the years… 6

CSR is certainly not new to India:

CSR is certainly not new to India 7

Swami Vivekananda :

Swami Vivekananda Do you know Swami was behind the Rockefeller foundation which is one of the largest charitable foundations ever in the globe? His famous words “ why don’t you consider leaving some of your money for other people? ” led to the first major donation by John D Rockefeller who was at one time the richest man on mother earth and his wealth measured as % of GDP was even bigger than Bill Gates’ 8

Tatas and CSR:

Tatas and CSR “In a free enterprise, the community is not just another stakeholder in business but is in fact the very purpose of its existence." Jamsetji Nusserwanji Tata, Founder , Tata Group . Tata Sons Ltd . is said to utilize on average between 8 to 14 percent of its net profit every year for various social causes . Refer to Corporate Social Responsibility: A Case Study Of TATA Group by Amit Kumar Srivastava1, Gayatri Negi , Vipul Mishra, Shraddha Pandey 9

Four Phases of CSR in India:

Four Phases of CSR in India Source: Wikipedia 10

Phase 1:

Phase 1 Charity and philanthropy were the main drivers Culture, religion, family values and tradition were main influences Influence of caste groups and political objectives. 11 Phase 2 During Independence movement “Trusteeship” concept of Mahatma Gandhi Thrust was towards nation building and socio economic development

Phase 3:

Phase 3 Mixed economy- Setting up of PSU’s Limited effectiveness Shift of expectation to private sector 12 Phase 4 Globalization and Economic Liberalization CSR directed towards sustainable business strategy Companies more willing to participate


Now…. Let us proceed to the new law… 13

Background to CSR:

Background to CSR Government has been mulling over Corporate Social Responsibility and ways and means of making this a way of corporate life Globally, there are no legal mandates for CSR spends… India, has pioneered this through a provision in Companies Act, 2013 14

S 293(1)(e) and S 181 vs S 135:

S 293(1)(e) and S 181 vs S 135 15

Estimated amount of CSR post Companies Act 2013…:

Estimated amount of CSR post Companies Act 2013… Upto Rs.18,000 crores may be spent on CSR by Indian Corporates… Deccan Herald 30, S ep 13 16400 companies Around 14000 will contribute less than Rs 1cr. Estimates vary but huge amount going to be spent 16 Introduction

Comparison of current vs. possible CSR- PSU’s (Rs. Crores):

Comparison of current vs. possible CSR- PSU’s (Rs. Crores) PSU Actual 2% of PAT % gap ONGC 121 473 74.42 Coal India 119 235 49.36 IOC 83 156 46.79 SBI 71 261 72.80 SAIL 61 103 40.78 GAIL 54 78 30.77 NTPC 49 187 73.80 BHEL 37 116 68.10 HPCL 27 22 -22.73 BPCL 8 29 72.41 17 Introduction Source: Deccan Herald – 30 th September 2013

PowerPoint Presentation:

Private sector Actual 2% of PAT % gap RIL 288 423 31.91 Tata Motors 146 78 -87.18 Bharti Airtel 33 130 74.62 L&T 70 96 27.08 M&M 22 59 62.71 TCS 51 179 71.51 Hindalco 28 72 61.11 ICICI bank 24 127 81.10 Infy 26 143 81.82 Maruti Suzuki 12 43 72.09 18 Introduction Comparison of current vs. possible CSR- PSU’s (Rs. Crores) Source: Deccan Herald – 30 th September 2013

Applicability {Sec 135 (1)}:

Applicability { Sec 135 (1) } Every Company having (in any financial year) Networth of at least Rs.500 crores OR Turnover of at least Rs.1,000 crores OR Net profit of Rs. 5 crores Thus, even private companies are covered, if they are of this size These companies will have to form a CSR Committee (including one independent director at least, subject to exemptions) Applicable from Financial Year 2014-15 ( Rule 1( 2) of CSR rules 27 Feb 14 ) It applies to company , its holding and subsidiary also(rule 3) if they fulfill criteria specified in S 135(1)- Also applies to foreign co having branch, project office in India (rule 3) 19

Issues in Applicability {Sec 135 (1)}:

Issues in Applicability { Sec 135 (1) } Even if in the current year, company ends up meeting the criteria, the company ought to have a CSR committee for the year Rules now have removed the difficulty related to Independent director Rule 5 clarifies that independent director is required only where applicable and Private company with 2 directors can have both in the CSR committee. 20

Issues on applicability:

Issues on applicability How can the CSR be extended to foreign cos as this is not contemplated in act? For a company to get out of the requirement it has to cease to be covered under S 135(1) for 3 consecutive years!(rule 3(2)) Thus it looks like a company which has less networth and turnover than prescribed but made a profit of Rs 6 cr in one year and hence is covered, if in next year it makes a profit less than Rs 5 cr , it will have to continue till 3 consecutive years of inapplicability is reached 21

CSR Committee {Sec 135 (3)}:

CSR Committee { Sec 135 (3) } Formulate and recommend to board CSR policy , which shall indicate the activities to be undertaken by the Company Recommend the amount to be spent on the activities Monitor compliance with the CSR policy from time to time 22

CSR Policy {Rule 6}:

CSR Policy {Rule 6} The CSR policy of a company shall include: A list of CSR projects or programs that company plans to undertake Within the purview of schedule VII Specify modalities of execution and implementation The monitoring process 23

Board Responsibilities {Sec 135 (4)}:

Board Responsibilities { Sec 135 (4) } Approve the CSR policy Place the CSR policy on the company’s website Ensure that CSR activities as per policy are undertaken Ensure that the company spends at least 2% of the average net profits of the company made during the three immediately preceding financial years Give preference to the local area and areas around it where it operates 24 Role of the Board - Governance

Board Report {Sec 135 (2) - (5) and 134 (3) (o)}:

Board Report { Sec 135 (2) - (5) and 134 (3) (o) } To contain: Composition of the CSR Committee Disclose the contents of the CSR policy Details of amount spent and the 2% of net profit as computed Reasons for not spending the amount on CSR, if such amounts are not spent Rule 8 and Annexure 25 Role of the Board - Governance

Disclosure in company’s website:

Disclosure in company’s website Rule 9 requires disclosure in co website , if any, of contents of: CSR policy 26

Consequences of not spending :

Consequences of not spending No specific penalties prescribed Reasons for not spending to be provided as stated already Will general penalties in Chapter XXIX apply? 27

CSR Spends:

CSR Spends Spends in every year, 2% of The average net profits Made during the three immediately preceding financial years Explanation also states, that average net profits shall be calculated in accordance with section 198 Rule 2 (f) provides that net profit shall not include a) profits arising from branches outside India b) dividend received from companies in India covered under and complying with the provisions of S 135 Surplus shall not form part of business profit of co. (rule 6(2)) 28

Net profit under section 198:

Net profit under section 198 Description Amounts Profit as per books Add: Income tax Loss on sale of items of a capital nature including sale undertakings Provision for doubtful debts /advances (-reversals thereof) Less: Profits of a capital nature including profit from sale of the undertaking Profit on sale of fixed assets to the extent it is more than the original cost Adjustment for fair value measurements directly effected in reserves Profit under section 198 29

Non recalculation of profits:

Non recalculation of profits Rule 2 (f) states: Net profit in respect of a financial year for which relevant financial statements were prepared in accordance with the provisions of the Companies act, 1956 shall not be required to be re-calculated in accordance with provisions of this act This can be interpreted to say that if calculation of net profit has been done u/s 349 of 1956 act, that need not be recalculated. It could also mean that exclusion of foreign branch income and dividends from applicable companies should not be done. 30

What can you spend on? (Notification dated 27 Feb 14):

What can you spend on? ( Notification dated 27 Feb 14 ) 31

What can you spend on? Contd. (Notification dated 27 Feb 14):

What can you spend on? Contd. ( Notification dated 27 Feb 14 ) 32

What can you spend on? :

What can you spend on? Expenditure only in India (rule 4(4)) Give preference to local area/areas where it operates ( S 135(5)) Not to benefit only employees and families (as it says only, it can extend to them also)(rule 4(5)) Recent demand by the Labor Union of a Company- CSR funds shall be utilised for educating their children! Not as direct or indirect contribution to a political party (rule 4(7)) Can be given as corpus for projects/programs if within the purview of Sch VIII (Rule 7) 33

Limit on own personnel:

Limit on own personnel Rule 4(6) sets a very low limit of 5% on CSR capacities of own personnel or their implementing agencies through established track record of 3 years This limit is so low it may be not useful at all Also what is meant by the clause is not clear - should mean CTC of employees? 34

Activities in the normal course of business not allowed:

Activities in the normal course of business not allowed See rule 2(e), 4(1), Proviso to 6(1) This would mean Company cannot do any activities which are in the normal course of business. Thus a company which is the business of distance education cannot do CSR in education; a water purifier company can’t supply its product free or at low cost; a soap manufacturing company cannot distribute free soap for hygiene; hospital cannot provide healthcare; priority sector lending by a bank would not qualify… etc Is this the intention? 35

Normal course of business –an example:

Normal course of business –an example Hotels which are star rated need to train some under-privileged people under Hunar Se Rajgar scheme These people are trained in the hotel operations for 6-8 weeks. Part of the stipend is reimbursed by IHM but hotel incurs expenses on balance stipend, food, uniform etc. This expenditure may not qualify as this is in the normal course of business, though it is coming under Sch viii 36

Normal course of business-contd.:

Normal course of business-contd. When new projects are started there is a pre-condition that some social investment shall be done e.g building a school, arranging drinking water supply, building a bridge etc Such activities would not qualify as they are in the course of business. It is possible a Company can provide a product it manufactures free of cost to the needy –like a Pharma co providing free medicines or hotel company providing free food and treating the cost thereof as CSR- this needs clarification. 37

Is this required?:

Is this required? A distance education pioneer may be best suited to provide better education to masses. Is it right to take the experts out of their business? Also since the list is to be followed strictly some companies may find it necessary to fit what they would like to do into one of the listed items Case in point is Supplying solar lanterns to villages- while it is not directly mentioned one can fit it into education (students can read in the night) or sustainability. 38

Co-operative efforts possible:

Co-operative efforts possible Rule 4(2) allows undertaking CSR through Outside Regd trust Outside Regd society If above have established track record of 3 years in similar programs/projects Or co u/s 8/trust/society established by Holding, subsidiary or associate co Or otherwise If co has specified projects etc and modalities of fund utilization and monitoring and reporting mechanism Or collaborate with other companies in such manner that respective cos can report on the projects and programs 39

CSR and FCRA (Foreign contribution regulation act 2010):

CSR and FCRA (Foreign contribution regulation act 2010) When Indian companies with overseas shareholding exceeding 50% and foreign companies give donations it is considered as receipt from ‘foreign sources’ and the recipient requires registration under FCRA This would be an impediment to CSR contributions by such cos. For foreign companies RBI approval may also be required under FEMA 40

CSR and Income Tax act:

CSR and Income Tax act Social and welfare community expenses deductible as expenditure for business. Madras HC in CIT V Madras refineries Ltd (2004) 266 ITR 170 Cheran engg corporation Ltd V CIT (1999) 238 ITR 892 In (2009) 313 ITR 334 Supreme court has remitted back a similar case of Madras refineries to Tribunal Waters need to be tested! 41

Is a provision required in accounts?:

Is a provision required in accounts? We do not have any Guidance yet on this matter One view is that provision is required under AS 29 The question is :Is there a realistic alternative to not spending the money? The answer could be yes- as there is a provision for not spending and explaining reasons The act is not an obligating event –see for instance: Smoke filter example in AS 29 There is not even a penalty for not spending (which is there in smoke filter example); not even linked to dividend payment etc. Provision will however be needed when orders have been placed and commitment has been made Even when Government Companies are mandated to spend by DPE , no such provision is created Though there is a ICAI EAC opinion stating a reserve shall be created as an appropriation for unspent amount. 42

Recent developments :

Recent developments Rural electrification corporation has decided to contribute Rs 2cr to a Literacy project Gail has paid Rs 5cr to same NGO- Padho aur Badho Govt has set up dedicated cell NFCSR (National foundation for CSR) as an arm of IICA Sambhavana Society rolling out portal showcasing work of NGO’s to help corporates select NGO’s in their areas of interest. Ecotimes 19 Apr 14 43

Recent developments contd.:

Recent developments contd. The Andhra Pradesh High Court (APHC) in its recent order has stayed the Andhra Pradesh Pollution Control Board (APPCB )’s directive to all industries including pharma and bulk drugs to allocate at least one per cent of their project cost towards Corporate Social Responsibility (CSR) activity . NEWS ITEM 14 MAR 14 44

PowerPoint Presentation:

Implement global standards like OECD Guidelines Global Reporting Initiative IISO 26000 Voluntary Principles UN Global Compact Equator Principles IFC Performance Standards Extractive Industries Transparency Initiative UN Principles for Responsible Investment Trace (anti-bribery compliance, tools, support, standards) 45 Managing CSR well

PowerPoint Presentation:

Stop equating CSR with corporate philanthropy Take a holistic view of the impacts of business on society and environment Develop CSR strategies with potential for large scale social and economic impact Identify select areas of effective and measurable action Identify and hire or partner with professionals Do not feel pressured to take on the operational responsibility of every initiative undertaken Collaborate wherever possible 46 Managing CSR well

CSR in India:

CSR in India In June 2008, a survey was carried out by TNS India (a research organization) and the Times Foundation with the aim of providing an understanding of the role of corporations in CSR The findings revealed that over 90 per cent of all major Indian organizations surveyed were involved in CSR initiatives. The leading areas that corporations were involved in were livelihood promotion, education, health, environment, and women's empowerment. 47

CSR in India:

CSR in India 48

CSR in India:

CSR in India 49

CSR by Corporate Foundations:

CSR by Corporate Foundations 50

CSR Internationally:

CSR Internationally 51

Final word- CSR could be a business opportunity for some :

Final word- CSR could be a business opportunity for some If your company is in any of the areas prescribed for CSR this could be a great business opportunity you should grab! Business Standard recently carried an article that Sintex is looking at CSR as a growth area for their businesses. They are in biogas , environment products, and wastewater treatment systems 52

FAQ on CSR rules :

FAQ on CSR rules If in a sick company there is a profit only because of restructuring of loans in one of the years and otherwise it is a loss and company with negative networth , what should be done? The profit arising because of such write backs shall be considered. How are losses in any of the three years to be treated? Also accumulated losses? If before three years the company has accumulated losses should that be adjusted? There is no provision to adjust accumulated losses. However if in one or more of the years there is a loss, then that shall be deducted from the profit of other years. 53

FAQ on CSR rules contd.:

FAQ on CSR rules contd. What about cases of merger of companies ? The treatment would depend on whether HC approval has been received; if received, the reported figures would have been adjusted for merger and that should be taken; if no approval has come and no adjustment has been made in books, the merger shall be ignored 54

FAQ on CSR rules contd.:

FAQ on CSR rules contd. If Company is in existence for only say 2 years what should be done? Should two year profits be divided by 3 or 2? If financial year of a company is less than 12 months or year end has been changed in between what should be done? The average profit will arise only in such companies, which have been in existence for 3 years. The years would include any financial year whether 12 months or more or less. Thus it would not apply to companies in existence for less than 3 years 55

FAQ on CSR rules contd.:

FAQ on CSR rules contd. If SEBI or other authorities have ordered revision of financial statements, which figure should be taken? The revised figures shall be considered. For arriving at profits should qualifications of auditors to the extent quantified be adjusted? No. If branch outside India has only expenses and no revenue, should it be deducted to arrive at profits? No. 56

FAQ on CSR rules contd.:

FAQ on CSR rules contd. If dividend is declared by investee company covered under and complying with S 135 from out of its past reserves whether that would still be entitled to exemption? It would seem so. Will dividend received from a foreign subsidiary etc be exempt? It should logically be though it is not clear from the law Would ‘complying with’ by investee co. (rule 2f) mean fully complying with? Would spending 1% instead of 2% help? It would seem that complying would mean fully complying with and certificates may have to be obtained from the investee co. 57

FAQ on CSR rules contd.:

FAQ on CSR rules contd. Will fixed assets created be recognised as CSR expenditure? Yes. When Company has control over the assets they should be capitalised in the books of accounts Can a related party incur CSR expenditure? There seems to be no bar –esp. as collaboration is allowed- subject to suitable disclosures 58

What if you could predict the outcome of your CSR activity?:

What if you could predict the outcome of your CSR activity?  “Measuring how much it costs to produce a single ‘unit’ of impact, called ‘ cost per outcome, ’ can tell with a high probability whether a nonprofit program will work.” Perry Yeatman of Mission Measurement, - See more at: http:// www.marketsforgood.org /predict-success-nonprofit-before-it-starts/#sthash.f9yf1Qjz.dpuf 59


Conclusion Under CSR organizations consider the interests of society by taking responsibility for the impact of their activities on : Customers Suppliers Employees Shareholders Communities Other stakeholders and The environment. It should not be seen just a statutory obligation and compliance with legislation but should be undertaken as a way of life and commitment to society at large . 60

Thank You!:

Thank You! 61

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